Legal & Regulatory

Land Acquisition May Become Easier in India, but Risks Remain

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 By Adam Pitman, International Business Advisory Manager, Dezan Shira & Associates 

When foreign companies announce plans to invest in India, they are often inundated with incentives from different levels of Indian government. However, outside the halls of government, officials are constrained in what they can feasibly deliver. In many cases, officials trip on their own shoelaces – projects worth billions of US dollars are currently stalled because of land acquisition regulations.

In recent weeks, the government announced two initiatives that will make acquiring and repurposing land easier for many businesses. Reforms to land acquisition and environmental regulations compliment the government’s ‘Make in India’ initiative, which is designed to improve conditions for manufacturers, but will also improve international perception of India’s investment climate.

The government’s initiatives will alter pre-investment considerations for many businesses; some burdensome aspects of land acquisition and use will be removed for projects in critical development areas. The reforms will also change the nature of on-going land disputes. However, land acquisition and environmental regulations remain sensitive issues; market entry and business advisory services are still mission-critical for foreign companies.

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India Regulatory Brief: Indian Mines Open up to Auction, India-ASEAN FTA from July

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India to begin auctions for iron ore, bauxite, zinc and copper mines

On January 12, the Indian government issued an executive order for the auction of iron ore, bauxite, zinc, copper, and a number of other mines. The announcement follows similar directives made in October last year, when India’s coal mining industry was denationalized and opened up to the private sector. 

The announcement will end almost 60 years of central and provincial governments’ complete control of India’s mines. Previously, licenses were sold to firms without any competitive bidding, which led to allegations of corruption and resulted in bad performance levels for numerous important mines. The new policy is therefore intended to enhance transparency and boost productivity. Licenses will be issued for a period of up to fifty years, with provincial governments selecting which mines go up for auction and central government setting the rules for bidding.

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India Moves Towards Revamping its Arbitration Regime

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By Shilpa Goel – Business Advisory Associate, Dezan Shira & Associates 

At the recently concluded “Vibrant Gujarat Summit” in Gandhinagar, Gujarat, Prime Minister Narendra Modi assured foreign investors of the Government’s commitment to make India one of the easiest destinations in the world to do business. Indeed, since coming to power, the Government has taken several reformative measures to materialize this intent. The proposed amendment to the Arbitration and Conciliation Act, 1996, is a step in the right direction.

An overhaul of India’s arbitration regime has been long overdue. According to the Global Competitiveness Report (2014-15) published by the World Economic Forum, India ranked 57 out of 144 countries in efficiency of legal framework in settling disputes. Although India performed relatively well among the BRICS countries, it fell several places behind other Asian superpowers, namely China and Japan, both of which secured ranks within 50 in this category.

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India Regulatory Brief: New Indian Accounting Standards, Changes to Environmental Law

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India announces revised roll-out for new Indian Accounting Standards

On January 2, India’s Ministry of Corporate Affairs announced a revised plan for the implementation of the new Indian Accounting Standards (IndAS), which largely follow International Financial Reporting Standards (IFRS). If passed, the IndAS will bring Indian company accounting procedures in line with global corporate accounting standards.

The new IndAS is applicable to large companies on a voluntary basis for accounting periods beginning on or after April 1, 2015, and on a mandatory basis for accounting periods beginning on or after April 1, 2016. The new IndAS is expected to attract significant foreign investment. However, despite wide acceptance of the international financial integration benefits, few domestic companies have operational plans for the change, owing to transitional costs, compliance burdens, or pending evaluations.

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A Guide to India’s Transfer Pricing Law and Practice – Part 1

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By Shilpa Goel – Business Advisory Associate, Dezan Shira & Associates 

India enacted transfer pricing rules in 2001, which require companies to conclude international transactions with associated enterprises at an arm’s length. The legislation is primarily targeted at large business groups who engage in base erosion and profit shifting to avoid paying corporate income tax in India. This article is the first of two that will provide an insight into some of the key compliance issues that surround India’s transfer pricing regime, which has, since its enactment in 2001, evolved and acquired new shapes.

The key transfer pricing legislation in India is contained in Chapter X of the Income Tax Act (IT Act), 1961. In addition, the Central Board of Direct Taxes (CBDT) issues circulars and notifications as well as specific guidance known as Taxpayer Information Series, which, together with rulings of tax tribunals and courts, comprise Indian transfer pricing rules. These are given effect to by specialists working under the CBDT’s supervision, including the Directorate of International Taxation and Transfer Pricing, Transfer Pricing Officers (TPO), and Assessing Officers (AO).

In interpreting domestic transfer pricing rules, courts in India rely on guidance published by the Organization for Economic Cooperation and Development, such as commentaries on specific transfer pricing provisions contained in model double tax avoidance conventions and the transfer pricing guidelines for multinational enterprises and tax administration. However, the domestic legislative framework takes precedence over the OECD guidance.

Concept of “arm’s length price”, “international transaction” and “associated enterprises”

Section 92 of the IT Act requires international or specified domestic transactions carried out between associated enterprises to reflect arm’s length pricing – that is, the price that would have been paid if such transactions were made between independent third parties at general market value.

For the purpose of the IT Act, “international transaction” means a transaction between two or more associated enterprises and includes purchase, sale or lease of tangible or intangible property, provision of services, or lending or borrowing money, or any other transaction that has a bearing on the profits, income, losses or assets of the enterprise.

“Associated enterprise” means, in relation to another enterprise, an enterprise that participates, directly or indirectly, in the management, control or capital of the other enterprise. The IT Act also sets out a certain shareholding participation threshold under which two or more enterprises are deemed to be associated with each other.

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Methods for calculating arm’s length price

The rules state that the arm’s length price must be established using five specific transfer pricing methods. These methods – which largely mirror those outlined in the OECD guidance – include comparable uncontrolled price, resale price, cost plus, profit split, and transactional net margin methods. Additionally, the CBDT prescribes other appropriate methods to establish the arm’s length price so long as they are in conformity with the OECD guidelines.

Transfer pricing documentation and penalties

An enterprise entering into an international transaction with an associate enterprise must maintain transfer pricing documentation, the requirements of which are set out in Section 92D of the IT Act and Rule 10D of the Income Tax Rules. The rules require enterprises to submit details of international transactions in Form 3CEB, which is appended to the tax return. Any supplementary documentation must be produced before the tax authority upon request.

Transfer pricing documentation is pivotal in defending the enterprise’s own transfer pricing treatment and avoiding transfer pricing penalties. A penalty is applicable where the enterprise has failed to file Form 3CEB, or where the enterprise fails to submit all necessary details of international transactions and associated enterprises, and where submitted, the details provide an inaccurate account of particulars of income.

Transfer pricing audit, adjustments and appeal

In India, the principal approach in selecting cases for transfer pricing audit is “risk-based”, which is carried out through the Computer Aided Selection System (electronic software). CASS plays an important role in selecting cases for transfer pricing audit as large taxpayers (with annual income of more than INR 10 lakhs, approximately US $15,750) submit electronic returns. Paper returns, however, escape such an extensive selection process.

Taxpayers who have recorded international transactions worth more than INR 15 crores (approximately US $2.4 mil) in a given year are subject to mandatory scrutiny. In 2014, a government-appointed Tax Administration Reform Commission recommended doing away with mandatory scrutiny for lack of adequate infrastructure, hinting that the CBDT fails to pursue other “appropriate” cases in its pursuit for cases under mandatory scrutiny.

The tax authority is entitled to make transfer pricing adjustments to the enterprise’s total income in calculating the arm’s length price. The tax adjustment is subject to penalties, which is calculated based on the increase in the total taxable income or a decrease in the amount of allowances following such an adjustment.

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An enterprise disputing the tax authority’s adjustment may file an appeal against assessment orders according to the provisions set out under Sections 246 to 262 of Chapter XX of the IT Act. An appeal first lies with the Commissioner of Income Tax (CIT Appeals), and must be made within 30 days from the date of assessment order. Alternatively, Section 144C of the IT Act provides for an optional Dispute Resolution Panel (DRP) to speedily adjudicate disputes relating to international transactions, including transfer pricing.

An appeal further lies with the Income Tax Appellate Tribunal within 60 days from the date of the order of the CIT Appeals or the DRP. Thereafter, appeal lies with the respective High Court and finally with the Supreme Court. The limitation period prescribed for appeals is fixed and may only be varied at the discretion of the adjudicating authority and subject to presentation of satisfactory evidence justifying the delay.

Advance pricing agreements

In 2012, the Government introduced an advance pricing agreement (APA) regime with a view to reducing transfer pricing litigation. An APA is an agreement between the tax authority and the taxpayer to determine, in advance, the arm’s length price in relation to an international transaction. Under Section 92CC of the IT Act, the CBDT is empowered to enter into an advance pricing agreement with any person, determining the arm’s length price or specifying the manner in which the arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.

An APA can be of three kinds: unilateral, and bilateral or multilateral APAs involving foreign tax authorities. Once entered, an APA is usually binding and valid for five years, but may be declared void on grounds of fraud or misrepresentation of facts. Primarily, an APA is entered into with the following four objectives:

  • Increases tax certainty, as arm’s length pricing is pre-determined;
  • Avoids double-taxation, as a bilateral or multilateral APA binds a foreign tax authority;
  • Reduces compliance costs, as audit risks are eliminated; and
  • Easy transfer pricing documentation.

To strengthen the administrative set up of APA to expedite disposal of applications, Budget 2014 introduced a “Roll Back” provision in the APA scheme, which implies that an APA entered for future transactions may be applied to international transactions undertaken in the previous four years in specified circumstances.

Mutual agreement procedure

In addition to APAs, countries usually agree a mutual agreement procedure (MAP) at the time of concluding double tax avoidance agreements (DTAAs). The procedure is usually contained in Article 25 of the DTAA, which requires two contracting countries to endeavour to amicably resolve tax disputes (by way of arbitration) that arise from the DTAA. As part of its work on base erosion and profit shifting (analysis to be included in part 2 of this article), the OECD is seeking to set out a uniform framework on MAP for countries to apply. However, at the recently concluded meeting of the Group of Twenty (G-20) nations in Australia, India’s representation expressed reservations on introducing a mandatory arbitration clause in tax treaties.

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About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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IB Nov issue smallEstablishing Your Sourcing Platform in India
In this issue of India Briefing, we highlight the advantages India possesses as a sourcing option and explore the choices available to foreign companies seeking to create a sourcing presence here. In addition, we examine the relevant procurement, procedural and tax duty concerns involved in sourcing from India, and conclude by investigating the importance of supplier due diligence – a process that, if not conducted correctly, can often prove the undoing of a sourcing venture.

Taking Advantage of India’s FDI Reforms
In this edition of India Briefing Magazine, we explore important amendments to India’s foreign investment policy and outline various options for business establishment, including the creation of wholly owned subsidiaries in sectors that permit 100 percent foreign direct investment. We additionally explore several taxes that apply to wholly owned subsidiary companies, and provide an outlook for what investors can expect to see in India this year.

An Introduction to Audit in India In this issue of India Briefing, we examine how India’s accounting standards differ from the globally accepted IFRS and IAS protocols, and outline the standard steps and procedures an Indian auditor will go through during the audit process and explain pre-audit preparations that can be carried out to make the process easier to follow and understand for foreign executives.

How to Establish an NGO in India

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By Grace Tate

The Indian government has long been wary of foreign political interference through the operation and funding of non-governmental organizations (NGOs). As a result, the current legislation affords regulatory discretion to the government by prohibiting foreign funding for political organizations and imposes onerous reporting requirements for all NGOs. Recent intelligence reports have sparked fears that these laws are undergoing government reform to further restrict NGO operation in India.

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Sourcing and Procurement from India: Establishing an Office on the Ground

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DELHI – For businesses wanting direct control over their sourcing operation in India, establishing a local presence is an integral step. Although creating an office on the ground inevitably necessitates a greater financial and legal burden for the company in question, it is an effective means of ensuring higher performance levels from a sourcing platform.

First of all, the company must decide on what sort of entity they want to establish, from which they will be able to manage their sourcing operation in India by varying degrees of control. In this excerpt from our latest India Briefing magazine, we compare the two most relevant options.

Liaison Office

By far the cheapest and simplest to establish of the two, liaison offices are typically used by foreign companies as a communication channel with their sourcing operation in India. Its functions are described in this graph:

The parent company of an LO must have:

• A three-year record of profitable operations;
• A net worth of at least US$50,000.

They must then:

• First be approved by the Reserve Bank of India (RBI), and register with the Registrar of Companies within 30 days of beginning their operations in India;
• Once approved, they can operate for a maximum of three years, and then request renewal.

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Whilst an LO is a useful tool for monitoring a sourcing operation in India, and can be established with comparatively minimal expense and legal pressure, its functions and capabilities are notably finite. They cannot undertake any commercial or industrial activities and consequently are unable to manage exports or earn an income in India. The upshot of this condition, however, is that liaison offices are not liable for taxation in India.

For these reasons, a company with an LO would still be taking an ‘indirect’ route to source from India. The principal role of a liaison office is therefore to ensure that suppliers are performing adequately. If a greater level of control is desired, however, a branch office should be selected.

Branch Office

The powers of a branch office are far greater than those of an LO. Most importantly, a BO is able to manage its exports itself. As well as the functions of a liaison office, a BO can best be described as follows:

The parent company of a BO must have:

• A five-year record of profitable operations;
• A net worth of at least US$100,000.

Additionally, a company must:

• Provide details of its operating history, interests in India, and reasons for wanting to open a BO.

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Like an LO, a BO must have prior approval from the RBI before it is established. Once approved, it can then register with the tax authorities, obtain a permanent account number, and be issued visas for its staff.

The only significant restriction placed on a BO is its inability to directly engage in the manufacturing process. This, however, can be bypassed if the office is established in a Special Economic Zone (SEZ), and in a sector that allows 100 percent FDI. Because a BO has powers to export products from India, it is considered a ‘direct’ means of managing a sourcing operation. It is therefore the best option for a company wishing to exercise a high level of control over their sourcing platform.

 

IB Nov issue smallThis article is an excerpt from the November issue of India Briefing Magazine, titled “Establishing Your Sourcing Platform in India“. In this issue, we highlight the advantages India possesses as a sourcing option and explore the choices available to foreign companies seeking to create a sourcing presence here. In addition, we examine the relevant procurement, procedural and tax duty concerns involved in sourcing from India, and conclude by investigating the importance of supplier due diligence – a process that, if not conducted correctly, can often prove the undoing of a sourcing venture.”Establishing Your Sourcing Platform in India” is out now and available as a complimentary download in the Asia Briefing Bookstore.

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In this issue of India Briefing Magazine, we outline the fundamentals of India’s import policies and procedures, as well as provide an introduction to the essentials of engaging in direct and indirect export, acquiring an Indian company, selling to the government and establishing a local presence in the form of a liaison office, branch office, or wholly owned subsidiary. We conclude by taking a closer look at the strategic potential of joint ventures and the advantages they can provide companies at all stages of market entry and expansion.

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New Indian e-Visa Scheme Makes it Easier for “Casual Business” Visits

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DELHI – Last week, India loosened its electronic visa policies for visitors from 43 nations including Australia, Brazil, Germany, and the U.S.  Although the changes are chiefly aimed at boosting international tourist visits to the country, the new e-visa can also be used for a “casual business” visit and should encourage more businesses to travel to the country.

The new visa is part of an Electronic Travel Authorization (ETA) Scheme which requires visitors to apply online at least four days before leaving for India.  The visitor can then print a copy of the authorization and take it directly to immigration authorities.

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